Q1. Acquisition Costs of Realty
Martin Buber Co. purchased land as a factory site for $400,000. The process of tearing down two old buildings on the site and constructing the factory required 6 months.
The company paid $42,000 to raze the old buildings and sold salvaged lumber and brick for $6,300. Legal fees of $1,850 were paid for title investigation and drawing the purchase contract. Martin Buber paid $2,200 to an engineering firm for a land survey, and $68,000 for drawing the factory plans. The land survey had to be made before definitive plans could be drawn. Title insurance on the property cost $1,500, and a liability insurance premium paid during construction was $900. The contractor's charge for construction was $2,740,000. The company paid the contractor in two installments: $1,200,000 at the end of 3 months and $1,540,000 upon completion. Interest costs of $170,000 were incurred to finance the construction.
Instructions
Determine the cost of the land and the cost of the building as they should be recorded on the books of Martin Buber Co. Assume that the land survey was for the building.
Q2. Capitalization of Interest
On July 31, 2017, Amsterdam Company engaged Minsk Tooling Company to construct a special-purpose piece of factory machinery. Construction was begun immediately and was completed on November 1, 2017. To help finance construction, on July 31 Amsterdam issued a $300,000, 3-year, 12% note payable t Netherlands National Bank, on which interest is payable each July 31. $200,000 of the proceeds of the note was paid to Minsk on July 31. The remainder of the proceeds was temporarily invested in short-term marketable securities (trading securities) at 10% until November 1. On November 1, Amsterdam made a final $100,000 payment to Minsk. Other than the note to Netherlands, Amsterdam's only out-standing liability at December 31, 2017, is a $30,000, 8%, 6-year note payable, dated January 1, 2014, on which interest is payable t each December 31.
Instructions
(a) Calculate the interest revenue, weighted-average accumulated expenditures, avoidable interest, and total interest cost to be capitalized during 2017. (Round all computations to the nearest dollar.)
(b) Prepare the journal entries needed on the books of Amsterdam Company at each of the following dates.
(1) July 31, 2017.
(2) November 1, 2017.
(3) December 31, 2017.
Q3. Classification of Costs and Interest Capitalization
On January 1, 2017, Blair Corporation purchased for $500,000 a tract of land (site number 101) with a building. Blair paid a real estate broker's commission of $36,000, legal fees of $6,000, and title guarantee insurance of $18,000. The closing statement indicated that the land value was $500,000 and the building value was $100,000. Shortly after acquisition, the building was razed at a cost of $54,000.
Blair entered into a $3,000,000 fixed-price contract with Slatkin Builders, Inc. on March 1, 2017, for the construction of an office building on land site number 101. The building was completed and occupied on September 30, 2018. Additional construction costs were incurred as follows.
Plans, specifications, and blueprints - $21,000
Architects' fees for design and supervision - 82,000
The building is estimated to have a 40-year life from date of completion and will be depreciated using the 150% declining-balance method.
To finance construction costs, Blair borrowed $3,000,000 on March 1, 2017. The loan is payable in 10 annual installments of $300,000 starting on March 1, 2018, plus interest at the rate of 10%. Blair's weighted-average amounts of accumulated building construction expenditures were as follows.
For the period March 1 to December 31, 2017 - $1,300,000
For the period January 1 to September 30, 2018 - 1,900,000
Instructions
(a) Prepare a schedule that discloses the individual costs making up the balance in the land account in respect of land site number 101 as of September 30, 2018.
(b) Prepare a schedule that discloses the individual costs that should be capitalized in the office building account as of September 30, 2018. Show supporting computations in good form.
Q4. Nonmonetary Exchanges
On August 1, Hyde, Inc. exchanged productive assets with Wiggins, Inc. Hyde's asset is referred to below as "Asset A," and Wiggins' is referred to as "Asset B." The following facts pertain to these assets.
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Asset A
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Asset B
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Original cost
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$96,000
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$110,000
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Accumulated depreciation (to date of exchange)
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40,000
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47,000
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Fair value at date of exchange
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60,000
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75,000
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Cash paid by Hyde, Inc.
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15,000
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Cash received by Wiggins, Inc.
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15,000
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Instructions -
(a) Assuming that the exchange of Assets A and B has commercial substance, record the exchange for both Hyde, Inc. and Wiggins, Inc. in accordance with generally accepted accounting principles.
(b) Assuming that the exchange of Assets A and B lacks commercial substance, record the exchange for both Hyde, Inc. and Wiggins, Inc. in accordance with generally accepted accounting principles.